Mr. BAILEY. In our presentation of May 23, we recommended to your committee that, inasmuch as the Panama Canal is a dual-purpose enterprise, built for national defense and national and international commerce, a proper proportion of its cost or expense should be charged to or borne by national defense. As we demonstrated to your committee, this has not been the practice in the past. We suggested that in the future the minimum contribution which may be equitably made on account of its national-defense characteristics is that there should be no further charge for interest on capital provided for its construction or improvement by the United States Government. A former witness referred to certain items which have been charged to national defense, and as far as we can ascertain from the record, those are strictly military items, and we differentiate between strictly military items and dual-purpose items and the national-defense characteristics of the Panama Canal.

We further suggested that the toll schedule at Panama should reflect rates sufficient to pay all operating expenses properly allocable to transit operations, including maintenance, depreciation of all expendable parts, and a proper charge for the expenses of providing all facilities and services necessary to the operation of the Canal and for its employees and their families.

We pointed out that, if interest paid on United States funds be excluded, transit tolls paid by commercial vessels, plus tolls forgiven on Government vessels, have exceeded all construction and improvement costs and all operating costs for transit purposes by about $2,000,000 to date.

There are other means of substantiating the fact that on a proper accounting basis and taking into account even a minimum charge against its national defense characteristics, the investment and operating cost of the Panama Canal to date have been fully amortized to the United States Government.

Now we have a statement which I would ask the committee to kindly examine. The schedule on page 2 is the computation of the dual-purpose expenses. We need not bother with that at the moment. It is a substantiating statement.

There have been many discussions concerning the investment cost for defense characteristics of the Panama Canal and its appurtenances. One such study was ordered by the Secretary of War in 1921. The minimum amount allocated in this study to such defense features leaves a maximum, nondefense capital investment on the part of the United States Government in the Panama Canal as of the year 1922 at $275,000,000. Schedule A demonstrates that (a) the profits derived from operation of the Canal and associated activities, the primary source of which has been tolls collected from commercial vessels, plus-we come to column 2-tolls forgiven on United States Government ships, plus column 3, one-half of the cost of the operation of dual-purpose activities to serve the Canal, which have heretofore been charged exclusively against the Canal, and (b) minus interest at 3 percent per annum on the unamortized balance of such nondefense capital investment in each year gives the result that at January 1949 all such capital investment was fully amortized. In other words, the Government has received in full its capital outlay. You may wish to examine that with your accountants, but that merely shows that from the profits from the tolls forgiven, charging

only half of the dual-purpose expenses and charging interest on the amount which the War Department accountants said in 1922 represented nondefense capital, we have amortized the investment, and there is a minimum amount, which is a minus amount, of $853,000. In my presentation of May 23, I pointed out to the committee the very large investment by the British Government in 1875 by Prime Minister Disraeli. I neglected to say to the committee that there is conclusive evidence that Great Britain considered the Suez Canal as of primary importance for her national defense, lying as it does along what has been well termed the lifeline of the British Empire between the British Isles, on one hand, and India, Australia, and New Zealand, on the other. While the investment of Great Britain in the Suez Canal has undoubtedly been a profitable investment from a monetary standpoint alone, we believe that few students of history would deny that the strengthening of the bonds which bind together the British Empire was the primary consideration involved in the transaction. Disraeli himself said in Parliament on February 21, 1876, and I quote:

have never recommended, and I do not now recommend, this purchase as a financial investment. If it gave us 10 percent of interest and a security as good as the Consols, I do not think an English Minister would be justified in making such an investment; still less if he is obliged to borrow the money for the occasion. I do not recommend it either as a commercial speculation, although I believe that many of those who have looked upon it with little favor will probably be surprised with the pecuniary results of the purchase. I have always and do now recommend it to the country as a political transaction, and one which I believe is calculated to strengthen the Empire. That is the spirit in which it has been accepted by the country. Because they think we are obtaining a great hold and interest in this important portion of Africa, because they believe that it secures to us a highway to our Indian Empire and our other dependencies, the people of England have from the first recognized the propriety and the wisdom of the step which we shall sanction tonight.

Representing as it does stock in a commercial enterprise, Great Britain could not well write this investment off against the defense of the Empire, but that in no manner changes the fact that the basic principle was defensive communication and transportation along the Empire's life line.

There has been some discussion concerning the incidents which led up to the President's recent action in proposing an increase in Panama Canal tolls. With the permission of the chairman, I would very much like to put into the record the pertinent parts of this legislative history taken from the records of the House and of the Senate. At this time, however, I would like to quote a few brief extracts therefrom, and ĺ might just say, Mr. Chairman, that it starts with a question by Mr. Engel before the House Committee on Appropriations when General Mehaffey was before him.

Mr. Engel said:

Is there any reason, in view of the fact that everything has gone up, including the freight rates which are collected by the ships that go through the Canal, why we should not go up in the toll rates charged to compensate us for this increased cost of operation?

I would like to mention again that we are talking about a broader principle. We are talking about a proper allocation of cost for commercial transit and for national defense, and we are also suggesting to the committee that, whatever the proper and increased cost of the operation of the Canal for transit purposes, it should be borne by the

tolls, so that, if there is the necessity for an increased operating cost, the tolls should reflect that increase.

Appearing before the House Committee on Appropriations on January 20, 1948, General Mehaffey, Governor of the Panama Canal, said, and these are his words:

Immediately following the war, it seemed to be that shipping conditions were so unsettled that it was difficult to predict that shipping would perhaps not grow enough in the near future, so that at the present rate of tolls our income would be sufficient to pay the operating expenses and perhaps a fair rate of return on the net invested capital.

I think that the experience during the past year or two indicates that the traffic has settled down to what might be considered reasonably normal for the present time, and we are making a study of the tolls in the Canal Zone at this time, having in mind the possibility of recommending an increase to the full amount permitted by the law.

Now at that time, in accordance with good, conservative estimating, the Governor said he thought he might have a deficit of out-of-pocket expenses of somewhere between $300,000 and $600,000. As a matter of fact, according to his report, which has since been completed, he had a surplus for 1948 of, I believe the figure is, $2,353,000 in out-ofpocket expenses. So he did almost $3,000,000 better than he thought he would do for the year.

Now in reporting H. R. 5524, the Army civil-functions appropriations bill, the House had the following to say concerning the Panama Canal item, and this is from the House report:

In the meantime, operating costs have materially increased to a point where the Panama Canal finds itself with insufficient funds from tolls to meet all operating costs. In view of the facts, including the fact that commercial shipping interests have increased their charges to the public, it is the opinion of the committee that tolls charges should be increased.

Now we bring down the chain of events that led up to this. Before the Senate Subcommittee on Army Civil Functions considering the appropriation bill, including the Panama Canal item, General Mehaffey said, and I now quote him:

I am quite prepared to say that, in spite of taking a little issue with Mr. Bailey just for the sake of complete accuracy of the record, that I suspect that we will certainly take in enough money in the fiscal year of 1949 to pay all of our operating expenses.

In fairness, I think we should say that the Governor was talking about out-of-pocket expenses unquestionably. Then he went on:

I think also that we will take in very little money in 1949 which could be considered as applicable to the payment of interest on the net capital investment.

On March 9, 1948, the Chairman of the United States Maritime Commission addressed a letter to the chairman of the Senate Subcommittee on Civil Functions containing, among others, the following statement. Now Mr. Mellon has very forcibly and very clearly told you the position of the Commission, but there is a different angle to this which Mr. Mellen didn't touch on; and, with your permission, I would like to read it because of a different angle that is involved. The Chairman of the Maritime Commission says:

The Maritime Commission, from its experience with prewar and postwar intercoastal shipping, is of the opinion that an increase in Panama Canal tolls at this time would seriously impede the revival of intercoastal shipping. Failure of our efforts to restore the intercoastal trade would involve serious consequences to domestic commerce and the national defense.

While the domestic water carriers have published some increases in freight rates since the end of the war, such increases have not been sufficient to compensate for increased costs of operation; and further increases adequate to the needs of the service cannot be effected in the face of the depressed level of water-competitive rates maintained by the railroads.

We feel that the raising of Panama Canal tolls involves consequences to United States maritime interests of such moment that the step should not be taken unless the Congress finds it imperative after full consideration of all the issues involved. One of such issues is the question of the extent to which merchant shipping should be required to bear the cost of operating the Canal, including the cost of functions that are purely military. The Canal has a dual function, serving alike the interests of commerce and national defense. The fact that United States military vessels enjoy free transit suggests that merchant shipping may already be carrying an excessive share of the Canal's operating costs.

While in this letter we have discussed intercoastal shipping, the discouraging effect on our maritime enterprises of raising Panama Canal tolls might extend and be detrimental to American-flag ship lines in foreign commerce as well.

We question strongly if after full investigation, in which the shipping industry and the Maritime Commission would be privileged to present their views and supporting evidence, Congress would consider it in the public interest for these tolls to be raised. Meanwhile, we hope it will be possible for your committee and the House Committee on Appropriations to take action to prevent the quoted language from the House committee report being regarded and complied with as a mandate to raise the Canal tolls prior to the holding of a hearing on the question. We hope that this committee and the House committee will agree that such action should not be taken except on the basis of such a hearing.

In its report, the Senate committee referred to what had been said in the House committee, and it followed with this language:

In view of the additional information and evidence on this matter developed at the committee's hearing, which was not available to the House committee, the committee strongly urges that the proclamation increasing the Canal tolls be reviewed, especially in the light of the adverse effect such an increase will have on American shipping.

Now, Mr. Chairman, there has been a reference to how the Army feels about Canal tolls; and, if I were running any major government department, I, of course, would want it to be self-sustaining. I think the question we have before us is the larger question of national policy, and that question of national policy turns upon the point of how much of the Canal's functions were intended by this Government when it was originally constructed for the purposes of national defense and how much of it was intended for the purposes of commercial transit, and that there should be a fair, equitable, and just division of those costs and expenses between the two functions.

I am very grateful to you for the time and patience, thank you very much.

Mr. THOMPSON. Mr. Bailey, have you had your accounting people make a study of the tolls that would be necessary in the event the entire cost of the Panama Canal were charged off and we operate from here on simply to cover the out-of-pocket expenses plus depreciation?

Mr. BAILEY. Mr. Thompson, we have run up some figures. Of course, it is very difficult to tell what the level of shipping is going to be. We are coming into a rather uncertain period; we had one after the other war and we are facing one now. We can't tell you with any degree of certainty what the level is going to be of shipping that is going to use the Canal, and we also do not know what this committee will consider as a fair division of the dual purpose services. I would think that somewhere 25 cents below the present level, somewhere in that neighborhood-perhaps it might be 10 cents off, one way or

92239-49-7

the other, somewhere in that neighborhood-is where it would land if we wrote off the original investment, considering it had been amortized and put it on a pay-as-you-go basis and charge whatever is necessary in tolls to cover the operating cost of the Canal against the ships that actually use it.

Mr. THOMPSON. Charging a certain share to the United States war vessels, and so forth?

Mr. BAILEY. Yes. I think they should carry their share of whatever it is.

Mr. THOMPSON. I suppose they take the position they built the Canal, and I can see reason to give our ships a little preference, but they take the position, I think, that they don't want to hand it out to foreign vessels that may use it.

Mr. BAILEY. I understand their position and I understand Mr. Mellen's position very well, but as I say, that is a matter of major policy which is in the hands of this committee. The Congress once decided against us on that issue. Now we leave that one with the committee.

Mr. THOMPSON. That is just exactly the light the committee is trying to find [laughter].

Mr. BAILEY. I am sorry, sir, but when it comes to a question which the Congress has passed on, I have to leave that with the committee. Mr. THOMPSON. There is a certain total figure for a year that would be required under your recommended plan.

Mr. BAILEY. Yes, sir.

Mr. THOMPSON. Let us figure that out and see how much it would

come to.

Mr. BAILEY. We have already made some rough calculations, Mr. Thompson. We will have to complete those, and I would be happy to submit them to the committee.

Mr. THOMPSON. I would like to have them.

Mr. BAILEY. We will give you what we think it is. It will be guessing, but we will give you what we think it might be and our reasons for thinking so in each instance, so that you could check our estimate as to whether or not we are on the high or low side, in your opinion, sir.

Mr. FUGATE. Mr. Bailey, any reductions in toll applicable to all ships transiting the Canal would have what effect upon American-flag vessels?

Mr. BAILEY. Well, it will have the effect in reduction of over-all operating costs.

Mr. FUGATE. Wouldn't that increase the competition from foreignflag vessels? You are already at a disadvantage because of cost of operation; isn't that true? Doesn't it cost more to operate a ship under the American flag because of increased labor cost and other costs, competitively speaking?

Mr. BAILEY. Unquestionably, Mr. Fugate, and it is a very substantial amount. It varies in various trades.

Mr. FUGATE. When you reduce the tolls, doesn't that increase the competitive feature?

Mr. BAILEY. Mr. Fugate, as we see it, the 1936 act has for its purpose the placing of the American ship on a comparative parity with its foreign competitor as to these other items to which you refer, where we are at a substantial disadvantage in cost, the majority of which is in the labor cost.